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Interpretation of provisions under the Income Tax Act regarding deduction of interest paid on capital borrowed for investment in a firm; Determination of whether deduction can be claimed if no share income was received from the firm in the corresponding previous year. Analysis: The judgment pertains to a reference under the Income Tax Act involving the assessment of an individual who was a partner in two firms. The primary issue revolved around the deduction of interest paid on capital borrowed for investment in one of the firms, despite no share income being received from that particular firm in the corresponding previous year. The assessee contended that the interest paid should be deductible in the computation of assessable income for the relevant assessment year. The Income Tax Officer (ITO) rejected the claim based on the premise that the deduction of interest could only be allowed if there was share income from the firm included in the assessment year. This decision was upheld by the Appellate Authority Commissioner (AAC). However, the Tribunal ruled in favor of the assessee, citing precedents from the Supreme Court and other High Courts to support the claim for deduction of interest paid on borrowed capital. The High Court concurred with the Tribunal's decision, emphasizing that the Income Tax Act allows deductions for expenses incurred to acquire a source of income, even if no income was generated from that specific source in the relevant year. The Court referenced a Supreme Court ruling that affirmed the entitlement to deductions for interest paid on borrowed capital, irrespective of the absence of income from the investment during the assessment year. The Court highlighted that the interpretation of the Act should not restrict deductions solely based on the actual receipt of income, especially in cases where there is a delay in income generation from the investment. Therefore, the Court upheld the Tribunal's decision, stating that the interest paid by the assessee could not be disallowed solely due to the absence of share income from the firm in the corresponding previous year. In conclusion, the Court answered the reference question in favor of the assessee, affirming the right to claim a deduction for the interest paid on capital borrowed for investment, even if no share income was received from the firm in the relevant assessment year. The judgment underscored the broader principle that deductions should be allowed for expenses incurred to acquire income sources, irrespective of the timing of income realization.
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